Selling hope, delivering harm

Myths vs. Facts

How the FHA Hurts Working-Class Families and Communities

The Federal Housing Administration (FHA) exists to help first-time home buyers and working-class families achieve the dream of homeownership. But by straying far from its mission, the FHA is now hurting the very low-income borrowers it is supposed to help. New research from American Enterprise Institute resident fellow Edward J. Pinto shows in painstaking detail how the agency’s policies are setting families up to fail. Here, he distinguishes myths and facts about FHA policies.

1. The government-sponsored enterprises had a major role in the housing crisis, but the worst is over.

No. The taxpayer bailouts ($180 billion so far) of Fannie Mae and Freddie Mac did not end the government’s massive role in the housing market. Much of the risk simply shifted to the FHA, whose insurance portfolio quadrupled in the past five years to $1.1 trillion. Today, the five faces of the government mortgage complex – Fannie, Freddie, the FHA, Ginnie Mae, and the USDA – account for 90 percent of all new mortgages. The FHA, in particular, has tried to grow its way out of its fiscal problems. The consequence of that effort is looming insolvency (it is $39 billion short of its legal capital requirement) and a wave of delinquencies and foreclosures that spell trouble for the fragile US economy. [MORE]

2. You say the FHA is pushing loans to marginal borrowers. But isn’t that its job?

The FHA’s job is to be the provider of responsible mortgage credit to low- and moderate-income Americans and first-time home buyers. That means fostering conditions in which borrowers can keep their homes and build meaningful equity, not handing them keys and saddling them with loans the agency knows they cannot afford to repay. [MORE]

3. For 2009–10, the average foreclosure rate on FHA-backed loans is just 10 percent.

True, but that average masks concentrated pain among working-class families and the communities they live in. By straying from its mission and insuring loans to higher-income borrowers, it is able to generate revenue that it uses to cover the foreclosures on working-class families who were pushed into loans with failure rates of 10, 20, and even 30 percent. Since these families live in low- and moderate-income communities, the FHA’s financing of failure condemns many of these communities to shocking levels of foreclosure. In Chicago, the five highest-foreclosure zip codes had projected failure rates of 35 to 73 percent. The five lowest, meanwhile, ranged from just 0 to 4 percent. [MORE]

4. You’re just cherry-picking hard-hit areas.

Actually, our study identified 9,000 zip codes across America where at least 10 percent of borrowers face foreclosure. Overall, one in every seven borrowers in these zip codes stand to lose their home – and their savings – to foreclosure. [MORE]

5. What’s the solution?

The FHA can return to solvency, be true to its original mission, and help America’s working-class families turn hope into homes by embracing four pillars of reform: (1) Stop knowingly lending to people who can’t repay their loans; (2) Help borrowers create real equity in their homes; (3) Step back from markets better served by the private sector; and (4) Concentrate on home buyers who truly need help.[MORE]